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How mauled Disney can reclaim its place among the lion kings

There are some companies which appear so wholesome that to discover they are subject to mortal weakness is not just disappointing, but almost beyond belief – like hearing that Marie Osmond has teamed up with Sue Barker to launch a lap-dancing club.

One such company is Walt Disney. It is possibly a generational problem – I am of an age that recalls not just 101 Dalmatians and Bambi, but also the weightily earnest nature films (“In spring, the bear cubs take their first nervous steps to the water’s edge, where a playful otter gives Bunty an unexpected bath”). This is part of the language of childhood security for me, but not for newer generations – a point to which I shall return.

So it is something of a shock to learn that the future of Disney is far from secure. Symptoms of malaise are unpleasant litigation and stories of truculent Mickey Mice in Disneyland, where only sunny dispositions are meant to shine. Disney has lost its innocence and, last week, even its ability to make money appears to have waned as it turned in a less than snow-white performance.

Profits from the core creative content division fell 33 per cent in the third quarter. Earnings per share, at 20 cents, were only rescued by sound returns from the theme parks, in particular some record attendances and higher spending at Walt Disney World in Florida (which must be an indicator of an American economy still expanding, despite the Federal Reserve’s efforts to cool down consumer spending).

Disney has lost more than a quarter of its stock market value this year. Chairman Michael Eisner talks of a reorganisation that will deliver “long-term strength and growth potential of the company’s brands and franchises”. I wonder.

The new weakness of Disney is right at its heart, in the creative content arm, which comprises film, animation, TV production and retailing. It is difficult to imagine activities that are more readily associated with the Disney heritage – what it founded its fortune on and where its brand value lies.

The deep-seatedness of this malaise may go some way to explaining why this is not an isolated purple patch in Disney’s corporate history. It had a flat 1998 and earnings have now fallen by some 27 per cent for the first nine months of its financial year. Sure, Disney needs another blockbuster, such as 1994’s The Lion King, but the business looks as though it needs more than a one-off palliative – it needs a sustained and sustainable development strategy.

The question has to be whether Eisner and his management can deliver it. Eisner himself talks about a “transition period” but it is far from clear what the goal of that transition is. The brand is undoubtedly its greatest strength, but in what commercial arena is it to be deployed? Wall Street analysts are so used to Disney downgrades now that they hardly make news.

Their patience is at breaking point and Eisner must know it. So why is he making such a meal of Disney these days? He is clearly no flake: a former ABC executive and head of

Paramount Pictures, which he revitalised, he took Disney by the scruff of the neck in the Eighties and re-established its role in family entertainment.

It’s only more recently that Eisner’s wheels have fallen off. Early this year, his bonus was almost cut in half (to a derisory $5m) as weak earnings took their toll. The Asian financial crisis, poor box-office receipts and costly new ventures took the blame.

But another reason for Eisner’s decline could be the inordinate amount of litigation to which he has been subjected over the past couple of years. Earlier this month, Disney finally settled a lawsuit with former studio chief Jeffrey Katzenberg, conservatively said to have cost some $500m (£296m), with Katzenberg’s settlement amounting to $117m (£69.4m).

Furthermore, Disney is embroiled in a trademark lawsuit from Internet search engine GoTo.com, which claims that Disney’s use of its Go Network on a traffic-light logo is a trademark infringement. Eisner has been forced to provide a sworn deposition.

Lawsuits in the US are part of a corporation president’s working day. But there is a cautionary tale here for all litigation-sensitive business leaders: spend too much time in court and your business is bound to suffer. Even in the US, where litigation is part of the fabric of commercial life, there has to be a limit to how much time someone like Eisner can waste with attorneys.

But that must be only part of the problem. You can distract the attention of the top man – and maybe that was part of Katzenberg’s inten tion – but an organisation such as Disney does not fall into long-term decline on the distraction of a single person.

Something more fundamental is going on. It may be that the Disney product just doesn’t cut it with today’s youth. It may be that the harder edge of Katzenberg’s Dreamworks SKG, co-owned with Steven Spielberg and David Geffen, providing sit-coms such as Spin City and movies such as Amistad, are more in tune with a generation that can respond to a plethora of product choices.

If that is so, Disney’s time may have come. It will then be the likes of Dreamworks, Viacom and Time Warner that capture the imagination of our children in less innocent ways than Disney captured ours years ago.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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